Sir Chips Keswick, chairman of Hambros Bank, issued an unprecedented public apology to the Co-operative Wholesale Society yesterday and paid a "substantial" cash settlement for his bank's part in Andrew Regan's aborted pounds 1.2bn bid for the group.

The CWS accepted the apology and dropped all legal action against the bank over the seven boxes of confidential CWS files used by Hambros during the bid attempt.

Travers Smith Braithwaite, the City law firm hired by Mr Regan for the bid, also made a similar apology and a "substantial" settlement with the CWS yesterday.

Sir Chips wrote personally to Graham Melmoth, chief executive of the CWS, saying: "Regretfully, I have to say that it is quite clear to me the judgement exercised in Hambros proceeding in the way that it did fell well below our standards and those which you were entitled to expect from us."

The Hambros chairman continued: "The purpose of this letter is to offer my personal and the bank's unreserved apology and to assure you that we are taking the appropriate action to ensure that this will not happen again."

The City was stunned by such an act of public contrition. One banking analyst, who refused to be named, said: "I haven't met anyone yet who can name a precedent for apologising like this in public to an adversary. It will take years for Hambros' reputation to recover from this. The trouble is this story has become so public - it's even got into the non- financial press."

CWS had originally said it would sue Hambros and Travers Smith Braithwaite because they had "acted in breach of an equitable obligation of confidentiality to CWS".

CWS said the two firms could have no credible grounds for believing that Mr Regan and his partners and advisers had legitimately obtained documents about the CWS .

The bid collapsed on Friday after a High Court judge said the case represented a "gross, wilful and disgraceful breach of confidence".

The judge added that Mr Regan and his advisers had acted in an "iniquitous manner".

Hambros and Travers Smith Braithwaite resigned from advising both Galileo, the bid vehicle, and Mr Regan's Lanica Trust company yesterday, while the Lowe Bell Financial public relations firm said it was "winding down" its work for the Regan camp.

Hambros yesterday commissioned solicitors Norton Rose to carry out an inquiry into the bank's handling of the affair. The bank said it did this after consulting with its regulators, the Bank of England and the Securities and Futures Authority (SFA). The Bank would not comment, but a spokesman for the SFA said: "We are aware of the independent inquiry by Norton Rose." No regulatory inquiries would be made until Norton Rose had completed its work.

A Hambros spokesman, asked whether the individuals in the bank who acted for Mr Regan - in particular Peter Large, one of its corporate financiers - were continuing to work as normal pending the outcome of the inquiry, said: "To my knowledge, yes."

The settlement payments from Hambros and Travers Smith Braithwaite are understood to be more than enough to cover CWS's legal costs in fighting the Regan bid. Last week the CWS Board indicated that damages could run into many millions of pounds.

As the fall-out from the aborted bid continued yesterday, Ronald Zimet, a key figure in the bid saga, resigned as chairman of Freepages Group because, a company spokesman said, Mr Zimet was worried that his involvement in the CWS affair was damaging Freepages' share price. "He decided to fall on his sword," said the spokesman. The share price had fallen from 45p at the end of last week to 37p at noon yesterday but recovered to 40p following the announcement.

In January 1995 Mr Regan made a pounds 2.4m payment to Mr Zimet's Cayman Islands- based company Trellis International, in return for negotiating an extension of a supply contract between Hobson, Mr Regan's former company, and the CWS.